Cost-Volume-

Profit
Analysis: A
Managerial
Planning
Tool
DIAH HARI
S U RYA N I N G R U M
 Objectives
Objectives
1. Determine the number of units that must be
sold to break even or earn a target profit.
2. Calculate the amount of revenue required to
break even or to earn a targeted profit.
3. Apply cost-volume-profit analysis in a multiple-
product setting.
4. Prepare a profit-volume graph and a cost-
volume-profit graph, and explain the meaning of
each.
 Objectives
Objectives
5. Explain the impact of risk, uncertainty, and
changing variables on cost-volume-profit
analysis.
6. Discuss the impact of activity-based costing
on cost-volume-profit analysis
 Cost-Volume-Profit
Cost-Volume-Profit (CVP)
(CVP) Analysis
Analysis
CVP Analysis:
1. Emphasizes the interrelationship of costs,
quantity sold and price.
2. Focuses on the factors that effect a change in
the component of profit  Fixed and Variable
component of cost and revenue
Break-Even Point is the point where total revenue
equal to total cost  the point of zero profit
Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis

Narrative
Equation
Sales revenue
– Variable
expenses
– Fixed expenses

= Operating
income
Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis

Sales (1,000 units @ $400)

$400,000
Less: Variable expenses

325,000
Contribution margin

$ 75,000
Less: Fixed expenses
Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis

Operating Income = Sales – Variable Cost – Fixed Cost

Break Even in Units

0 = ($400 x Units) – ($325 x Units) – $45,000

$400,000 ÷ $325,000 ÷
1,000 1,000
 Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis
Operating Income = Sales – Variable Cost – Fixed Cost

Break Even in Units

0 = ($400 x Units) – ($325 x Units) –
0 = ($75 x Units) – $45,000
$45,000
$75 x Units = $45,000
Units = 600 Proof
Proof
Sales
Sales(600
(600units)
units) $240,000
$240,000
Less:
Less: Variable
Variableexp.
exp. 195,000
195,000
Number
Number of of unit
unit =
= Contribution
Contributionmargin$
margin$ 45,000
45,000
Fixed
Fixed cost
cost Less:
Less: Fixed
Fixedexpenses
expenses 45,000
45,000
Operating
Operatingincome
income $$ 00
CM
CM
 Achieving
Achieving aa Targeted
Targeted Profit
Profit
Operating Income = Sales – Variable Cost – Fixed Cost

Desired Operating Income of

$60,000
$60,000 = ($400 x Units) – ($325 x Units) –
$45,000 = $75 x Units
$105,000
Units = 1,400Proof
Proof
Sales
Sales(1,400
(1,400units)
units) $560,000
$560,000
Number
Number of of unit
unit = = Less:
Less: Variable
Variableexp.
exp. 455,000
455,000
Contribution
Contributionmargin$105,000
margin$105,000
(Targeted
(Targeted Profit
Profit ++ Less:
Less: Fixed
Fixedexpenses
expenses 45,000
45,000
Fixed
Fixed cost)
cost) Operating
Operatingincome
income$$ 60,000
60,000
CM
CM
 Targeted Income as a Percent of Sales Revenu
Desired Operating Income of 15% of
Sales Revenue
Sales Revenue = Price x
unit
0.15($400)(Units) = ($400 x Units) – ($325 x Units) –
$45,000
$60 x Units = ($400 x Units) – $325 x Units) –
$45,000
$60 x Units = ($75 x Units) –
$45,000 Operating
Operating Income
Income
$15 x Units = $45,000 =
=
Units = 3,000 CM
CM xx unit
unit
Remember: Break-Even volume is 600 units  OI = (3,000
– 600) x $75 = 180,000  Sales = $400 x 3,000 unit =
$1,200,000; 15% of sales ($180,000 / $1,200,000)
 After-Tax
After-Tax Profit
Profit Targets
Targets

Net income = Operating income – Income

taxes = Operating income – (Tax rate x Operating
income)
= Operating income (1 – Tax rate)

Or
Net income
Operating income (1 – Tax rate)
=
 After-Tax
After-Tax Profit
Profit Targets
Targets
If the tax rate is 35 percent and a firm wants to
achieve a profit of $48,750. How much is the
necessary operating income?
$48,750 = Operating income – (0.35 x Operating
income)
OR
$48,750 = (1 - 0.35) x Operating
income = 0.65 (Operating income)
$48,750
$75,000 = Operating income 
targeted profit
 After-Tax
After-Tax Profit
Profit Targets
Targets
How many units would have to be
sold to earn an operating income of
Units$48,750?
= ($45,000 +
$75,000)/$75
Units = $120,000/$75 Proof
Proof
Sales
Sales(1,600
(1,600units)
units) $640,000
$640,000
Units = 1,600 Less:
Less: Variable
Variableexp.
exp. 520,000
520,000
Contribution
Contributionmargin
margin$120,000
$120,000
Number
Number of of unit
unit = = Less:
Less: Fixed
Fixedexpenses
expenses 45,000
45,000
(Targeted Operating
Operatingincome
income $$ 75,000
(Targeted Profit
Profit ++ Less:
75,000
Less: Income
Incometax
tax(35%)
(35%) 26,250
26,250
Fixed
Fixed cost)
cost) Net
Netincome$
income$ 48,750
48,750
CM
CM
Break-Even
Break-Even Point
Point in
in Sales
Sales Dollars
Dollars
First,
First, the
the contribution
contribution
margin
margin ratio
ratio must
must be
be
calculated.
calculated.
Sales$400,000
Sales$400,000100.00%
100.00%
Less:
Less: Variable
Variable
expenses
expenses 325,000
325,000 81.25%
81.25%
Contribution
Contribution
margin
margin$$ 75,000
75,00018.75%
18.75%
Less:
Less: Fixed
Fixed exp.
exp. 45,000
45,000
Operating
Operating income
income$$ 30,000
30,000
 Break-Even
Break-Even Point
Point in
in Sales
Sales Dollars
Dollars
Given a contribution margin ratio of
18.75%, how much sales revenue is
required
Operating to break
income even?
= Sales – Variable costs – Fixed
costs $0 = Sales – (Variable costs ratio x Sales–
$45,000
$0 = Sales (1 – 0.8125) –
$45,000
Sales (0.1875) =
$45,000Sales = Dollars
Dollars Sales
Sales ==
$240,000 Fixed
Fixed cost
cost
CM
CM Ratio
Ratio
 Profit
Profit Targets
Targets and
and Sales
Sales Revenue
Revenue
How much sales revenue must a firm generate to earn a
before-tax profit of $60,000. Recall that fixed costs total
$45,000 and the contribution margin ratio is .1875.
Sales = ($45,000 + $60,000)/0.1875
= $105,000/0.1875
= $560,000

Dollars
Dollars Sales
Sales =
= (Targeted
(Targeted Profit
Profit ++ Fixed
Fixed
cost)
cost)
CM
CM Ratio
Ratio
 Multiple-Product
Multiple-Product
Analysis
Analysis
Whittier Company has decided to offer
two models of lawn mowers; with the
information as follows:
Mulching Riding
Mower Mower

Unit Sales 1.200 800

Price Sales $400 $800
Unit Variable Expense $325 $600
Contribution Margin $75 $200
Direct fixed expenses $ 30,000 $ 40,000 $ 70,000
Common fixed expenses $ 26,250
Total Fixed Cost $ 96,250
 Multiple-Product
Multiple-Product
Analysis
Analysis Mulching Riding
Mower Mower Total
Sales $480,000 $640,000 $1,120,000
Less: Variable expenses 390,000 480,000 870,000
Contribution margin $ 90,000 $160,000 $ 250,000
Less: Direct fixed expenses 30,000 40,000 70,000
Product margin $ 60,000 $120,000 $ 180,000
Less: Common fixed expenses 26,250
Operating income $ 153,750

How many of each model must be sold to

break-even?
 Income
Income Statement:
Statement: B/E
B/E
Solution
Solution Mulching Riding
Mower Mower
Total
Sales $184,800 $246,400 $431,200
Less: Variable expenses 150,150 184,800 334,950
Contribution margin $ 34,650 $ 61,600 $ 96,250
Less: Direct fixed expenses 30,000 40,000
70,000
Segment margin $ 4,650 $ 23,600 $ 26,250 ($75 x 3) +
Less: Common fixed expenses 26,250 ($200 x 2)
Operating income $ 0
Break-Even Packages = 1,200 : 800 unit sales
Used of Break-Even Packages = 3 : 2 
$96,250/$625 = 154
Mulching Mower = 3 x 154 = 462 units
The
The profit-volume
profit-volume graph
graph
portrays
portrays the
the relationship
relationship
between
between profits
profits and
and sales
sales
volume.
volume.
 Example
The Tyson Company produces a single product
with the following cost and price data:
Total
Total fixed
fixed costs
costs $100
$100
Variable
Variable costs
costs per
per unit
unit 55
Selling
Selling price
price per
per unit
unit 10
10
Selling price – Variable cost = $10 – $5

Income equation  I = $5 X
- $100
Legend: I = Income X = unit
Profit-Volume Graph
(40, $100)
$100 I = $5X - $100
Profit or
Loss —
80—
60— Break-Even Point
40— (20, $0)
20—
| | | | | | | | | |
0— 5 10 15 20 25 30 35 40 45
- 20— 50 Units
Loss Sold
- 40—
-60—
- 80—
- 100 (0, -$100)
— X = unit sold
The
The cost-volume-profit
cost-volume-profit
graph
graph depicts
depicts the
the
relationship
relationship among
among costs,
costs,
volume,
volume, and
and profits.
profits.

Revenue = Price x unit

Total Cost = (unit variable cost x
units) + Fixed Cost
The example:
Revenue = $10 x units
Total Cost = ($5 x units) + $100
 Cost-Volume-Profit Graph
Revenue
Total
$500 --
Revenue =
450 -- $10 x
451-- units
1 00) Total Cost
452-- fit ( $
Pro =
453-- ($5xunits)+
250 -- $100
Variable
200 -- Expenses ($200
150 -- Break-Even Point or $5 per unit)
454-- (20, $200)
Loss
50 -- Fixed Expenses
0 -- | | | | | |
($100)
| | |
| 5 | 10 | 15 20 25 30 35 40 45 50
55 60 Units Sold
 Assumptions
Assumptions of
of C-V-P
C-V-P
Analysis
Analysis
1. The analysis assumes a linear revenue function and a linear
cost function.
2. The analysis assumes that price, total fixed costs, and unit
variable costs can be accurately identified and remain
constant over the relevant range.
3. The analysis assumes that what is produced is sold.
4. For multiple-product analysis, the sales mix is assumed to be
known.
5. The selling price and costs are assumed to be known with
certainty.
Alternative 1: If advertising expenditures increase by $8,000,
sales will increase from 1,600 units to 1,725 units.
BEFORE THE WITH THE
INCREASED INCREASED
ADVERTISING ADVERTISING

Change
Change Units sold 1,600 1,725
Unit contribution margin x $75 x $75
ss in
in C-
C- Total contribution margin $120,000 $129,375
Less: Fixed expenses 45,000 53,000
V-P
V-P Profit $ 75,000 $ 76,375
Variabl
Variabl DIFFERENCE IN PROFIT
es
es Change in sales volume 125
Unit contribution margin x $75
Change in contribution margin $9,375
Less: Change in fixed expenses 8,000
Increase in profits $1,375
Alternative 2: A price decrease from $400 to $375 per lawn
mower will increase sales from 1,600 units to 1,900 units.
BEFORE THE WITH THE
PROPOSED
PROPOSED
Units sold 1,600 1,900CHANGES
CHANGES
Unit contribution margin x $75 x $50
Total contribution margin $120,000 $95,000
Less: Fixed expenses 45,000 45,000
Profit $ 75,000 $50,000

DIFFERENCE IN PROFIT

Change in contribution margin $ -25,000

Less: Change in fixed expenses --------
Decrease in profits $ -25,000
Alternative 3: Decreasing price from $400 to $375and
increasing advertising expenditures by $8,000 will increase
sales from 1,600 units to 2,600 units.
BEFORE THE WITH THE
PROPOSED
PROPOSED
Units sold 1,600 2,600 CHANGES
CHANGES
Unit contribution margin x $75 x $50
Total contribution margin $120,000 $130,000
Less: Fixed expenses 45,000 53,000
Profit $ 75,000 $ 77,000

DIFFERENCE IN PROFIT

Change in contribution margin $10,000

Less: Change in fixed expenses 8,000
Increase in profit $ 2,000
 Introducing
Introducing Risk
Risk and
and Uncertainty
Uncertainty
Margin
Margin of
of Safety
Safety
Assume that a company has the following projected income
statement:
Sales $100,000
Less: Variable expenses 60,000
Contribution margin $ 40,000
Less: Fixed expenses 30,000
Income before taxes $ 10,000
Break-even point in dollars (R):
R = $30,000 ÷ 0.4 = $75,000
Safety margin = $100,000 - $75,000 =
$25,000
 Degree of Operating Leverage (DOL)
Operating Leverage is the used of fixed cost to extract
higher percentage changes in profits as sales activity
changes Automatic Manual

Sales $1,000,000 $1,000,000

Less: Variable cost 500,000 800,000
CM $ 500,000 $ 200,000
Less: Fixed cost 375,000 100,000
Net Income $ 125,000 $ 100,000
Unit sales price $100 $100
Variable cost / unit $50 $80
CM/ unit $50 $20
DOL = CM/profit 4,0 2,0
Degree of Operating Leverage (DOL)
What will happen if sales increase 40%?

Automatic Manual
Sales $1,400,000 $1,400,000
Less: Variable cost 700,000 1,120,000
CM $ 700,000 $ 280,000
Less: Fixed cost 375,000 100,000
Net Income $ 325,000 $ 180,000

Increase in net income $200,000 $80,000

(160%) (80%)
Risk if sales not Higher Lower
increased
 CVP
CVP and
and ABC
ABC
Assume the following:

Sales
Salesprice
priceper
perunit
unit $20
$20
Variable
Variablecost
cost $10
$10
Fixed
Fixedcosts
costs(conventional)
(conventional) $100,000
$100,000
Fixed
Fixedcosts
costs(ABC)
(ABC) $100,000
$100,000with
with$50,000
$50,000subject
subjecttotoABC
ABCanalysis
analysis
Target
Targetincome
incomebefore
beforetax
tax $20,000
$20,000
Other
OtherData:
Data:
Unit
UnitLevel
Levelofof
Variable
VariableActivity
Activity
Activity
ActivityDriver
Driver CostsCosts Driver
Driver
Setups
Setups $1,000
$1,000 20 20
Engineering
Engineeringhours
hours $30
$30 1,000
1,000
 CVP
CVP and
and ABC
ABC
1. What is the unit must be sold to earn a before-tax
profit of $20,000 under conventional analysis?
Number of units = $120,000 ÷
$10
= 12,000 units

Number
Number of
of unit
unit =
= (Targeted
(Targeted Profit
Profit ++ Fixed
Fixed
cost)
cost)
CM
CM
 CVP
CVP and
and ABC
ABC
2. What is the unit under ABC
analysis?
Number of units = [$20,000 + $50,000 +
($1,000 x
20) + ($30 x 1,000)]/$10
= 12,000 units

Number
Number of
of unit
unit == (Targeted
(Targeted Profit
Profit ++ Fixed
Fixed cost
cost ++ABC
ABC
cost)
cost)
10%CM
10%CM
 CVP
CVP and
and ABC
ABC
3. What if only 10,000 unit can be sold, and the new design
cost less labor by $2, thus the new variable cost is $8.
Will the new design be approved?
BEP units = $100,000 ÷ ($20 - $8)
= 8,333 units
Yes. Under conventional analysis, the new
design will be approved since units sales >
BEP units  produces operating income of
$20,000 Number of unit = mhs Fixed
Number of unit = mhs Fixed
cost)
cost)
CM
CM
 CVP
CVP and
and ABC
ABC
4. Suppose requires a more complex setup increasing the
setup cost from $1,000 to $1,600 and requires 40% increase
in engineering support (from 1,000 hours to 1,400 hours),
will the new design be approved?
BEP units = [$50,000 +($1,600 x 20) +
($30 x 1,400)] ÷ ($20 - $8)
= 10,333 units
No. Under ABC analysis, the new design will
not be approved since units sales < BEP units
 produces operating loss of $4,000
Number
Numberof
ofunit
unit=
=(Fixed
(Fixedcost
cost++ABC
ABC
cost)
cost)
CM
CM
 Tugas Kelas (ppt)
Dolphin Co. telah mengembangkan produk baru yang akan dipasarkan untuk pertama kalinya selama
tahun fiskal berikutnya. Meskipun Departemen Pemasaran memperkirakan bahwa 35.000unit dapat
dijual dengan harga $ 36 per unit, manajemen Dolphin hanya memiliki kapasitas produksi yang cukup
untuk menghasilkan maksimum 25.000unit produk baru setiap tahun. Biaya tetap yang terkait dengan
produk baru dianggarkan sebesar $ 450.000 untuk tahun ini. Biaya variabel dari produk baru adalah $
16 per unit.
Diminta:
1. Berapa banyak unit produk baru yang harus dijual Dolphin selama tahun fiskal berikutnya untuk
mencapai titik impas produk?
2. Berapa untung yang didapat Dolphin dari produk baru jika semua kapasitas produksi yang
dialokasikan oleh manajemen digunakan dan produk dijual dengan harga $ 36 per unit?
3. Apa tingkat leverage operasi (DOL) untuk produk baru jika 25.000unit dijual seharga $ 36 per unit?
4. Departemen Pemasaran ingin lebih banyak kapasitas produksi khusus produk baru. Apa yang akan
menjadi persentase peningkatan operasi bersih pendapatan untuk produk baru jika penjualan
unitnya dapat diperluas 10% tanpa ada kenaikan biaya tetap dan tanpa perubahan harga jual unit
dan unit biaya variabel?
5. Manajemen Dolphin telah menetapkan bahwa produk baru tersebut harus mendapatkan laba
sebesar $ 125.000 pada tahun fiskal berikutnya. Berapa harga jual unit yang akan mencapai target
laba ini jika semua kapasitas produksi yang dialokasikan oleh manajemen digunakan dan semua
output bisa dijual dengan harga jual itu?